Opportunity Cost

Fill in the Blanks We have _________ wants and needs. We have _______ resources. Therefore, we must make ______

Review Questions 4 Factors of Production: –1.______ 2._____ 3.______ 4.________ Resources are allocated by answering these 3 questions: –1._______ 2._______ 3.______

Scarcity and Choice Productivity—The level of output that results from a given level of input. –Sleepy Time Clock Company: Employs 100 people—Produces 1000 clocks/day Each worker produces entire clock Need to improve productivity—Manager goal Efficiency

Sleepy Time Clock Company 100 employees 1000 clocks/week Avg. 10 clocks/worker Each worker produces the whole clock. Problem: Must close factory; not enough production/person What to do? Efficiency Division of labor Specialization Mechanization

Efficiency Example 100 Workers produces 1000 clocks –1000/100=10 clocks/worker/day 80 Workers produces 1000 clocks –1000/80=12.5 clocks/worker/day 110 Workers produces 1000 clocks –1000/110=9.1 clocks/worker/day What happens to the $ cost per clock as the clocks per worker >? <?

Efficiency Given :100 People; Earn $10/hour; Work 8 per day –Each worker paid $80 per day. (Factory produces 1000 clocks per day). –100X$80=$8,000 labor cost $8000/1000=$8.00 cost per clock –80X$80=$6,400 labor cost $6400/1000=$6.40 cost per clock –110X$80=$8,800 labor cost $8800/1000=$8.80 cost per clock

Efficiency Efficiency-is the use of the smallest amount of resources to produce the greatest amount of output. Division of Labor—Assigning a small number of tasks to each worker. Specialization—The focus of one activity. –Advantage: More efficiency and output –Find shortcuts-more clocks with same amount of people. –Mechanization: More machines/less workers. Technology—is the use of technical knowledge and methods to create new products or make existing products more efficiently.

Trade offs and Opportunity Cost Trade-Offs –ALL the alternatives that are given up when one choice is made over another –all individuals, businesses, large groups, government make trade-offs –Guns or butter Opportunity Cost—The value of the next best alternative given up to obtain and item –Most choices have many alternatives –They all are trade offs but only the 2 nd best choice is the opportunity cost. –Every choice has a cost. –TANSTAAFL – There Ain’t No Such Thin As A Free Lunch

Opportunity Costs Example You have $25 and it’s Saturday night:  Go to the Suns game  Go to the movies  Order pizza and hang out with friends  Go to a concert at the Dodge Theatre  Study Economics

Examples Circle K Late start After High School

Opportunity Costs Example Sleep late or wake up early for a ski trip? Sleep late or wake up early to eat breakfast? Sleep late or wake up early to study for a test?

Cost / Benefit Analysis Thinking at the Margin – how much more or less to do decision making process compare opportunity cost & the benefits what will be sacrificed, what will be gained once the opportunity cost outweighs the benefits, no more units should be added

Trade Offs / Opportunity Costs Assignment 1.List 5 things you would like to do with $ Those 5 are your _______________________. 3.Pick your top item you would purchase. 4.What would be your second choice? 5.Your 2nd choice is your ____________________. 6.What did you have to give up to spend $100? 7.What does the term “guns or butter” mean?